I am interested in the answer you receive as well. The decision might be influenced by whether you are eligible for CRDP or CRSC, and if you are eligible for both, whether you choose CRSC and the disability rate applicable to Combat Related. As you likely know, CRDP is taxable and CRSC is not.

I look forward to seeing what the experts say--AFChief is one of those experts.

I've never figured out exactly what the Strickland decision says, but from what I understand, this is how it works in my case.

Drew regular retirement from DFAS, awarded VA in Sep. Applied for and approved SRSC in Nov. retro back to last year. The 1099 from DFAS showed my retiremment up until SRSC approved. When I file my taxes for 2011, Strickland says I do not need to report what DFAS reported on 1099. Also allowed me to file an amended return for the portion of retirement that was taxed in 2010 back to the effective date, in my case 31 August.

What it basically boils down to is I don't have to go back and get DFAS to correct the 1099 forms back to effective date.

To answer the original question, Strickland only applies if you have been approved for CRSC.

Don't believe anything I say without confirming from a reliable source.

This is an attempt to explain Strickland. I am not a tax expert but have filed my own taxes and dealt with the Strickland issue in years past.

Before 2003/2004 any VA disability pay received was offset up to the full amount from military retired pay. When the VA issued a decision that went back months or years they owed you disability pay for that time. But, since you couldn't get both and had been receiving retired pay all that time they did not pay you. So, you wound up with money that DFAS paid you and reported as taxable that, in reality, should have been non-taxable disability pay. DFAS did not go back and reissue corrected 1099R's. You could make the correction to your reported taxable income, current or previous years, and cite Strickland as the justification.

Then, to further confuse the problem, laws were passed to permit DFAS to return to you under CRDP or CRSC some or all of the money that should have been,but was not, withheld from your retired pay . Money returned under CRDP is taxable income, just as is retired pay. Money returned under CRSC is non-taxable.

While the example given above does not include all of the information necessary to make a determination, it is likely that some of the $29 thousand retired pay is considered to be CRDP returned pay and the $9 thousand back pay is likely disability pay that was initially withheld by the VA. So, depending on the origin of the two amounts, the $9K would not be subtracted from the $29K to determine taxable income. There would probably be a small amount within the retired pay ($20K) that was reported but was still withheld due to receiving disability pay. This small amount (called the VA withhold) would be eligible for reduction under Strickland.

If the retired pay was considered to be returned under CRSC then the situation is different since CRSC pay is non-taxable.

alageezer wrote:I've never figured out exactly what the Strickland decision says, but from what I understand, this is how it works in my case.

Drew regular retirement from DFAS, awarded VA in Sep. Applied for and approved SRSC in Nov. retro back to last year. The 1099 from DFAS showed my retiremment up until SRSC approved. When I file my taxes for 2011, Strickland says I do not need to report what DFAS reported on 1099. Also allowed me to file an amended return for the portion of retirement that was taxed in 2010 back to the effective date, in my case 31 August.

What it basically boils down to is I don't have to go back and get DFAS to correct the 1099 forms back to effective date.

To answer the original question, Strickland only applies if you have been approved for CRSC.

The Strickland decision applies to VA disability only and I quote from the letter: " Internal Revenue Ruling 78-161, which is based on the Strickland Decision, provides that military retirees may receive the tax benefit derived from retroactive awards of VA disability compensation." CRSC is not taxable to begin with. CRSC pay just makes up for the pay that VA deducts from military retired pay that is rated as CRSC. Retirees can contact DFAS and receive a copy of the Strickland letter to include with there tax filings. I did a few years ago and file the letter every time I receive a VA increase. JMHO

Corporal Punishment wrote:Good evening....If anyone isn't too busy and has some level of clarity on this, would you please assist in the following hypothetical:

Retired in Nov 2010: Received retroactive VA service-connected disability compensation (70%) in the amount of $9,680.00 in September 2011.Military retirement income was $29K for 2011.

I file my own taxes on TaxSlayer. Does the Strickland decision mean that instead of putting $29K for income on my taxes that I can put $19,320.00 as income?

Respectfully,

The answer is yes. Just be sure to include a copy of the Strickland letter and a copy of the VA award letter that states how much disability pay you will receive, with you tax filings. You can get a copy of the letter from DFAS. Takes about a week to 10 days. I make a copy of mine to file every time I receive a VA increase. JMHO

Corporal Punishment wrote:Good evening....If anyone isn't too busy and has some level of clarity on this, would you please assist in the following hypothetical:

Retired in Nov 2010: Received retroactive VA service-connected disability compensation (70%) in the amount of $9,680.00 in September 2011.Military retirement income was $29K for 2011.

I file my own taxes on TaxSlayer. Does the Strickland decision mean that instead of putting $29K for income on my taxes that I can put $19,320.00 as income?

Respectfully,

The answer is yes. Just be sure to include a copy of the Strickland letter and a copy of the VA award letter that states how much disability pay you will receive, with you tax filings. You can get a copy of the letter from DFAS. Takes about a week to 10 days. I make a copy of mine to file every time I receive a VA increase. JMHO

The answer is more than likely no.

We do not have all of the
facts but the likely situation is that when the disability decision was
made that DFAS reclassified the normal retired pay he had received in
full as having been returned under CRDP, which is taxable. At 70%
disability the VA retro would have been a little larger than $9,680
($1228 for 8 or 9 months) and the difference was due to a VA withhold
(which had not been made by DFAS). That small amount might be covered
by Strickland but not the entire amount. He received the $9K from VA,
which is not taxed, and also had his retired pay restored because he was
able to keep the retired pay received. It would not be tax free twice
(unless restored under CRSC).

In order for Strickland to apply he
would not have received the funds from the VA. Neither would the VA
have paid the retro unless DFAS had made the conversion calculations and
identified any withhold that had to be recouped. DFAS had already made
the payment so the VA had to make the withhold from its retro pay--the
shortage in the $9,680.

I posted this a long time ago (use VBN Search....it works!), so maybe this will answer some of this (no opinion here, just the facts from IRS!)

Rev. Rul. 78-161
1978-1 C.B. 31
Sec. 104

IRS Headnote

Armed Forces retirement pay; retroactive disability determination. The
Service will follow the Strickland decision as precedent in holding that
a taxpayer, who retired from a branch of the Armed Forces in 1976 for
years of service and subsequently was awarded a retroactive service
connected disability rating by the Veterans' Administration, may exclude
from gross income under section 104(a)(4) of the Code that portion of
the retirement pay received from the branch of the Armed Forces during
the retroactive period that corresponds to the amount attributable to
the Veterans' Administration disability rating; Rev. Rul. 62-14 revoked.

Full Text

Rev. Rul. 78-161 [fn1]

Advice has been requested whether, under the circumstances described
below, a taxpayer may by reason of a retroactive disability compensation
determination by the Veterans' Administration, exclude from gross
income under section 104(a)(4) of the Internal Revenue Code of 1954, any
portion of the payments made to the taxpayer during the retroactive
period by a branch of the Armed Forces as retirement pay based on years
of service.

The taxpayer retired from the United States Army on January 1, 1976, for
years of service and began receiving retirement pay. On February 15,
1976, the taxpayer applied to the Veterans' Administration for service
connected disability benefits and was awarded, on December 1, 1976, a 90
percent disability rating retroactive to February 28, 1976. In order to
receive actual payment of the benefits the taxpayer filed, on December
15, 1976, a waiver, pursuant to section 1005 of the Veterans' Benefits
Act of 1957, 38 U.S.C. 3105, for reduction of the taxpayer's retirement
pay in an amount equal to the disability compensation benefits.
Effective from the date of the waiver the taxpayer began receiving
disability compensation from the Veterans' Administration and reduced
retirement pay from the Army.

Section 61(a) of the Code provides that unless otherwise excluded by
law, gross income means all income from whatever source derived,
including compensation for services.

Section 104(a)(4) of the Code and the regulations thereunder provide,
with certain exceptions not pertinent to this case, that gross income
does not include amounts received as a pension, annuity, or similar
allowance for personal injuries or sickness resulting from active
service in the armed forces of any country.

Section 3010(a) of title 38 U.S.C. provides, in part, that payments due
or to become due under any law administered by the Veterans'
Administration shall be exempt from taxation.

Rev. Rul. 62-14, 1962-1 C.B. 11, holds, in part that, when a taxpayer is
awarded disability compensation by the Veterans' Administration, no
portion of the regular Army retirement pay based on years of service
previously received is excludable from gross income even though the
effective date of the award is made retroactive.

In Strickland v. Commissioner, 540 F.2d 1196 (4th Cir. 1976), the
taxpayer retired from the Army for length of service and began receiving
retirement pay. Subsequently, the taxpayer applied to the Veterans'
Administration for service connected disability benefits and was awarded
a 10 percent disability rating. In order to receive actual payment of
the benefits the taxpayer filed the required Veterans' Administration
form on March 10, 1965, waiving that portion of Army retirement pay
equal to the amount of the Veterans' Administration disability benefits.
In March 1966 the taxpayer filed a second claim with the Veterans'
Administration requesting an increase in disability benefits. On January
17, 1967, the Veterans' Administration notified the taxpayer that the
taxpayer was awarded a 100 percent disability rating, as of March 28,
1966, entitling the taxpayer to an additional $208 per month disability
benefits. The Veterans' Administration commenced this benefit on
February 1, 1967, after the Army notified the Veterans' Administration
that it would correspondingly reduce the taxpayer's retirement pay. The
court held that the Veterans' Administration's retroactive determination
that the taxpayer was eligible for increased disability benefits was
controlling. Thus, the taxpayer was entitled to exclude from gross
income under section 104(a)(4) of the Code, part of the payments
previously received as retirement pay based on rank and length of
service.

The Internal Revenue Service will follow the decision of the United
States Court of Appeals for the Fourth Circuit in Strickland as
precedent in the disposition of similar cases involving section
104(a)(4) of the Code.

Accordingly, in the instant case, the taxpayer may exclude from gross
income under section 104(a)(4) of the Code, that portion of the
taxpayer's Army retirement pay received between March 1, 1976 and
December 15, 1976, that corresponds to the amount attributable to the
Veterans' Administration disability rating.

The Strickland decision preceded the
CRDP and CRSC legislation. Speaking only about decisions involving
CRDP some or all of the retired pay that would have earlier been
covered by Strickland would no longer qualify.

The
simplest way to look at Strickland is to look at how much back VA
compensation you would have received if you had not been retired and
then look at how much VA retro pay you actually received after DFAS
did the implicit transformation of regular retired pay to CRDP (in other words did their audit). Any
difference is most likely because it was withheld due to having
already been received as regular retired pay. This would still be withheld from your regular retired pay because of the CRDP phase-in. That amount would be non-taxable.

Once
DFAS has made the transformation from regular retired pay to returned
by CRDP it is no longer exempt as “attributable to the VA
disability rating”. Without this transformation there would be no
VA retro pay unless the disability pay exceeded the retired pay. If
the IRS looks at it they are not going to buy subtracting your VA
disability pay from your retired pay—nor should they since this is
not what Strickland says.

My husband received a 30% disability from 1992 until 2008. He retired on disability from his job in 1992. His military retirement didn't begin until 2001. Ergo, his 30% deduction from his retirement didn't begin until 2001. When we applied to the IRS to deduct the 30% from our taxes for my husband's retirement pay for those years, the IRS informed us that we didn't qualify for the Strickland Decision. The letter they sent me said the Strickland Decision only goes back for five years. Is this true? Then, what do we do about the 2001 to 2005 awards? Because he wasn't receiving any military money for 1992 to 2001, I realize that 30% equals no funding. But what about the 30% for the years he was receiving retirement benefits? We could really use the money now since I had to stop teaching to care for my husband and our bills, credit cards and home all went into the toilet. Is there anything we can do to recoup funding for those years?

I have a little difficulty understanding exactly the situation you present however I can provide the following information.

It is not the Strickland decision which limits amendments to five years but the Statute of Limitation laws which permits you to only go back five years in amending your taxes. Actually the limitation was three years before it was later modified for veteran disability pay. It is still three years for most things.

Strickland does not say that you can deduct from your reported income just because you are awarded a VA disability. It says if you received taxable military pay that caused non-taxable VA disability pay to be withheld then that amount can be excluded. If your husband was awarded a disability that had back pay (VA disability) withheld because he had already received the pay as retired pay, then Strickland would apply. You could go back five years from your latest tax filing and file amended returns. I think the five year rule is current but am not absolutely sure, it was three years when I filed amendments under Strickland.

However, once you start receiving VA disability payments the funds will have been reduced from the retired pay and are not reported in the Form 1099R as income so no adjustment is due.

If you qualify for federal amended returns it is also possible that amended State returns can also be filed it the state has an income tax.